This week in HR, I’m thinking about Cost-Effectiveness and pay bands. For many small businesses, pay-banding doesn’t seem very useful, but almost any size business can still benefit by defining the ranging value of each position. What I mean is, just because you may only have one person in a role, you should still understand the low-to-high range of pay rates you would need to pay to be competitive in the market, to be fair to the worker, and to stay healthily within your budget. Pay-grading is a logical way of thinking about what constitutes proficiency and excellence in performance as well as when there is room to grow.
Small businesses routinely offer what they believe they must pay to vie for talented, skilled, and loyal workers at larger businesses or more successful competitors, without respect to the actual value contribution of the role. These small businesses can have workers who are making more than they would elsewhere, and only some of the time is that justified in actual budgetary numbers. Overcompensating a worker is bad for the market all around, including the employee. It can spoil the worker, drive down initiative and innovation, and it can engender the wrong kind of loyalty. “I can’t go anywhere else, because I’d have to start at the bottom…” – we hear this a lot, right?
How many business leaders out there can appreciate this? When a worker won’t leave your organization because they don’t want to start at the bottom or learn new systems or upskill or whatever – is the quality of their work consistent? Are they innovating for you? Thinking critically about process and procedure, to save your organization money? Are they excited about the work you need them to do?
There are myriad reasons organizations might pay too much for work done, but usually for smaller and medium-sized orgs that don’t have internal compensation analysts, it boils down to your compensation policy, your workforce plan, and whether you have benchmarked and budgeted pay logically. Compensation can get irrational and out of hand very easily and quickly, especially without market information or when you haven’t thought through how your budgeted wage impacts your business.
So, what is a pay band? Salary.com defines it, “The compensation ranges your organization pays employees for a position or job grade, ranked by experience level and responsibilities. Each job grade has a rate range with a lower, middle, and upper salary. It establishes pay for a specific job grade, while giving the employer the freedom to differentiate that salary, based on experience, individual performance, and geography.
Pay band ranges are based on a blend of internal team metrics and external market metrics. The internal metrics ensure that the range of pay considers an employee’s experience level, education, organizational responsibility and growth potential. External metrics ensures the pay bands are in line with market rates in the same geographic region.”
To create your pay bands, you should…
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- Start with your comp philosophy. Will you be above, average, or below market?
- Have a strong and thorough job description. Do you understand not just responsibilities, duties, but also where in the organization the worker fits in?
- Examine levels at the organization and consider if there are cross-departmental correlations that will help you group positions to create the grade.
- Establish ranges based on what you find in the market and internally with experience and worker output.
- Educate managers on metrics and company needs, so they can properly contextualize and rate performance; pay according to set expectations and achievement.
Recently, I read someone’s assessment of how to decide where a worker falls in a band, and I’ll try to regurgitate…
Bottom of pay band: This worker is new to the role or inexperienced. They’re still learning the basics and how to be successful in the role, lots of room to grow.
Middle of pay band: This person shows the ability to navigate challenges that come with the role; however, there’s still room to grow, either hard or soft skills, or both.
Top of pay band: This worker is an expert in this role. They’ve navigated the role across a variety of different contexts, demonstrated experience tackling the most complex challenges that can come with the role, and the only way to continue growing is to step into the next title up. This is also the worker that is putting in the maximum and the company is getting the very best return on the investment of wages.
Why do pay banding? Usually, pay bands help employers avoid overpaying for positions that have a lot of room to grow, it gives predictability to managers, it sets and manages the employee’s expectations… Think of anything ‘arbitrarily conceived’ as the danger in compensation. Consistency, however, is more easily achieved with a carefully created pay banding system.*
Pay banding can be a part of your cost-effectiveness strategy. Compensation should certainly be a major part of your cost-effectiveness strategy going into 2023. empact hr helps organizations critically analyze their compensation policies, job descriptions, performance management practices, as well as their other benefits, like PTO and fringe, for competitiveness and compliance.
*You should always assess your pay bands for competitiveness, and you should also frequently poll employees for satisfaction. Market changes can happen quickly and right under your nose.
PHILIP CARRILLO, MBA, SHRM-SCP
Director, HR Services
Philip began his 12-year Human Resource career in HR Project Management and Recruiting in the legal tech sector, working for startups that were listed among Forbes Fastest Growing Companies. Philip has managed human capital operations in almost all 50 states and in parts of Europe. His experience ranges from compliance to leadership coaching. After achieving his MBA from Tulane University in 2019, Philip transitioned from in-house Director to consulting, where he focuses on helping leaders understand, document, and improve productivity and visibility through Performance Management, Mission Vision and Values integration, and Professional Development. Compliance remains a cornerstone of his strategic assistance to companies that want to scale carefully and smartly.
Philip believes that every employer can methodically create an attractive and inspiring Employer Brand and Human Capital strategy. “Every challenge can become the building block of a breakthrough opportunity through a dynamic HR strategy.”
